Photo by Sabrina Mazzeo on Unsplash
No book that deals with the GSEs is complete without mention of the steel-knuckled political charades Freddie and Fannie played when they were at the zenith of their powers. The supporting actors and thickening plot with its threatening fault lines have already been introduced: consumers and their politicians falling over themselves to support homeownership; two increasingly large, powerful companies bent on protecting their congressional charters; building social pressure to solve the growing divide between the housing haves and have nots by loosening mortgage underwriting standards and reforming subprime lending; plus all the industry cheerleaders just trying to keep the easy money–and all the homeownership subsidies–flowing smoothly.
As the larger, more established and politically connected GSE, Fannie Mae was the envy of the Freddie lobbyists. As recounted in All the Devils Are Here, former CEO Jim Johnson was the chief architect of the company’s take-no-prisoners approach to regulators and critics. He left Fannie a decade before the government take-over, so Fannie truly had a head start on Freddie Mac in terms of everything political. However, Freddie’s lobbying shop was fast developing a reputation of its own.
A friend and I were eating lunch in Freddie Mac’s cafeteria in early 2001 when the CEO stopped at our table. I remember getting flustered when he sat down, took a potato skin off my plate and ate it. Brendsel asked if I was really leaving Credit Risk Oversight for Government Relations, Freddie’s lobbying shop of about 30 people located not far from Capitol Hill.
I said yes, that I had been offered a job as director of public policy. In reality, it was a writing and research job that pretty much kept me chained to the desk, not hob-knobbing on the Hill. I was not a registered lobbyist and had no intention of becoming one.
His response startled me. “You’re going to DC?” he snorted. “That place is a hell hole!”
Freddie Mac behaved like any other corporation seeking to influence the legislative process. But Freddie wasn’t any other corporation. Case in point: the top item on my performance appraisal for my new job was “Defend the Charter.”
I could only guess what that would entail…
Minority Homeownership as Political Strategy
The trick to wining over the Bush Administration was to find an ideological space where the Republicans could tolerate us. Freddie didn’t expect loving kisses, just an armed truce. Freddie was big (Fannie even bigger) and neither was really a private sector company exposed to the buffeting winds of market discipline, a huge negative for conservatives. Second, the GSEs did housing, and aside from former New York representative and HUD Secretary, Jack Kemp, conservatives were not into providing public support for private housing.
[However,] single-family homeownership aligned perfectly with the ownership society that Bush often talked about. It didn’t hurt that a number of academic studies were finding correlations between homeownership and positive family outcomes, such as children’s educational achievement. The Washington think-tank crowd had identified housing as a panacea to a number of social ills. Everybody, it seemed, was suddenly talking about the benefits of homeownership.
Even more, a pro-homeownership policy appeared to align with Bush’s conservative base…Freddie’s top lobbyist and my boss [Mitchell Delk] had a hunch that, given Bush’s weak showing with the Hispanic vote in the 2000 election, the Administration would be willing to work with the firm on a new issue that might resonate with this part of the electorate.
The question was: how important was homeownership to Hispanic voters? …
The Golden Ring: State of the Union Address
Armed with the [glowing Hispanic] polling data, the homeownership research and the near life-sized photograph of [President George W.] Bush, Delk started to test-market his complex strategy. The first stop was to get a buy-in from Freddie Mac’s management. Characteristically, the top executives were not happy with the prospect of politics influencing business decisions, even if no material loosening of underwriting was being proposed.
Despite initial skepticism, CEO Brendsel must have given the green light to proceed. Several high-level meetings were hastily arranged, including one with then-HUD Secretary Mel Martinez, who seemed highly receptive to the initiative. Delk was quick to point out a prominent role for the HUD Secretary and provided examples of different homeownership events where the president’s initiative could be rolled out with great fanfare.
Timing was important. Delk had set his sights on the top prize: He was determined to see President Bush embrace the initiative publicly–and, by extension, the GSEs–by mentioning the minority homeownership initiative in the 2002 State of the Union address, less than a month away. He directed me to draft a few sentences to help White House speechwriters, if needed.
The weeks passed without a word. On the night of the speech, I was perched on the family-room sofa waiting for the President to come on TV when the phone rang. It was Delk. “It’s in,” he said. And hung up. My heart started to race.
A few minutes later, I heard President Bush say the magic words: “Members, we will work together to provide…broader homeownership, especially among minorities.”
Just a short sentence, but that hardly diminished the achievement. Delk would later gloat that minority homeownership was one of three domestic policy issues mentioned in Bush’s first State of the Union address following the September 11, 2001 attacks on the World Trade Center and the Pentagon.
Six months later, at a church in Atlanta, Georgia, Bush rolled out the administration’s minority homeownership initiative. In a brief moment of GSE glory, the president was flanked by the Freddie and Fannie CEOs, Leland Brendsel and Frank Raines. A host of housing and consumer groups applauded vigorously. Freddie ran the huge ad of President Bush in the Atlanta Constitution.
At the event, both CEOs publicly committed to expanding minority purchases by a combined $1 trillion over the next five years.
“I want to thank Leland and Frank for that commitment,” said Bush. “It’s a commitment that conforms to their charters, as well, and also conforms to their hearts.”
And to the bottom line, of course. As Air Force One took off with both CEOs on board, GSE political risk evaporated along with the fear of GSE privatization. Freddie stock closed up $2, or 3.19 percent, to $64.68.
“Doing homeownership” with the Bush Administration pumped new life into the GSE implicit guarantee. Freddie had become more associated not only with the government, but with the political agenda of the White House.
But it was a dangerous liaison. Bush’s mention of minority homeownership might have been a mere footnote in a speech otherwise dominated by post- 9/11 angst and resolve, but its import was not lost on the U.S. housing finance industry. Unwittingly perhaps, the conservative White House had just given its blessing to a new expansion of mortgage credit.
Excerpted from Chapter 7, Political Capture, from Days of Slaughter, Inside the Fall of Freddie Mac and Why It Could Happen Again, Johns Hopkins University Press, 2017